Over the years, in an attempt to
contain inflation, central bank has been raising interest rates. While there has
been increase in lending rates there has not been corresponding increase in
return on deposits. There has been crawling increase in yield on treasury bills.
All these factors have contributed to unprecedented spreads and enhanced income
for the commercial banks.

In the latest Monetary Policy Statement
the central bank has again expressed its intention to further increase the
interest rates. Though, the central bank has attracted a lot of criticism for
following persistent increase in interest rates, Governor State Bank of Pakistan
has been adamant and telling every one that increase in interest rates has
helped in containing inflation.

It is also on record that government
borrowing has been on the rise due to a number of factors, from less than
targeted revenue collection to increase in expenditures. The disruption in
economic activities has largely been responsible for lower revenue collection
but more importantly political uncertainty has acted like a double-edged sword.

Business community has been complaining
about the rising cost of doing business and eroding competitiveness due to hike
in interest rates. There has been increase in average lending rates, discounting
rate and export refinance rate. However, Governor State Bank is correct to a
large extent in saying that financial cost alone has not been responsible for
the eroding competitiveness of the local manufacturers. Partly the
manufacturers' inefficiencies, load shedding of electricity and gas, rising
utility charges and interruption in business activities, all put together, are
responsible for erosion in the competitiveness. Most of these factors are
manageable had the government and the business community being a little more
vigilant.

To begin with, the government's
attention has been distracted from economy due to the election. Return of
Benazir Bhutto and Nawaz Sharif to Pakistan and later on assassination of
Benazir resulted in further polarization and election had to be deferred. Thanks
to Allah that 18th February elections were peaceful and most of the political
parties have accepted the results. However, anti President Pervez Musrarraf
statements are complicating the issue and hinting towards another round of
confrontation. If the situation prevails installation of government could be
further delayed, adding to political uncertainty, hike in government expenses
and disruption in economic activities.

Over the last five years Pakistan's GDP
growth rate has been reasonably good, tough much lower compared to India and
China. However, the slow down in creation of new productive facilities,
non-availability of exportable surplus, declining exports and rising imports
have upset the equilibrium. Adhoc and inconsistent decision making is further
complicating the situation.

The next government faces two key
issues containing inflation and ensuring uninterrupted energy supplies at
affordable cost. The policy planners must remember that crude oil prices will
continue to hover above US$ 90 per barrel. Therefore, alternative indigenous
energy sources have to be developed to minimize dependence on imported fossil
oil. For ensuring uninterrupted electricity supply at affordable cost
electricity generation has to move away from thermal to hydel and nuclear
energy.

Policy planners must also try to find
ways for increasing production and productivity of the agriculture sector.
Disbursement of agriculture loans has increase but interest rate being charged
is very high compared to the interest rate being charged from the manufacturing
sector. It may be true that crop insurance is not common, because it was never
made mandatory. The time has come to secure all the loans extended to the
agriculture sector. It must be kept in mind that seeking insurance cover for all
the mortgaged and hypothecated assets is mandatory. By the same token all the
agri loans also need to be collateralized as well as insured.

Rising imports are not only eroding
foreign exchange reserves but also contributing towards erosion of rupee value
against dollar. Since export growth has not been sufficient to meet import bill,
trade deficit has been increasing and neutralizing the benefit of record inflow
of remittances. Quantum of FDI inflow is very low and proceeds from
privatization is almost at zero for some time.

To accelerate the GDP growth rate and
produce higher exportable surplus it is necessary that fresh investment should
be made in creating new productive faculties. To achieve this target lending
rates have to be reduced. Commercial banks have enjoyed exceptionally high
spread of around 7.5% for a very long time. Now it is the responsibility of the
central bank to convince the commercial banks to boost lending by reducing the
interest rates. In the past the government has followed SRO-based lending and
the same could be done again to boost investment.

It has been stated repeatedly in the
past that hike in interest rates cannot help in containing inflation because of
overflowing liquidity best stated by M2 growth. Unless this surplus liquidity is
utilized for creating new productive facilities, inflation cannot be contained.

Some of the economists are of the view
that declining capacity utilization of the existing manufacturing facilities and
slow down in the creation of new facilities hints towards recession. The trend
seems more dangerous because of a combination of rising prices and economic
downturn. It is a unique situation and demands radical decision making. Else the
country would plunge deeper into problems.

Pakistan needs to boost its exports and
also contain imports to bridge the widening trade deficit. Since passing on the
enhanced cost is not possible the only solution is to optimize cost through
improved capacity utilization and higher efficiency.